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SECURITIES LAWS AND COMPLIANCESPART A SECURITIES LAWS

STUDEY I I- SECURITIES MARKET REFORMS AND

DEVELOPMENT

LEARNING OBJECTIVES

Developments in regulatory framework related to Securities Markets inchronological order

Security Market Reforms and Development since 1997-98 till dateVarious new concepts introduced since 1992 such as dematerialization ofshares, book building, buy-back of shares, reforms on disclosurerequirements etc.

Secondary market reforms such as rolling settlement, circuit breakers,

price band and introduction of derivatives into India etc.

The study will enable the students to understand

INTRODUCTIONIn the planned economy concept, there were more controls and restrictionsthan the concept of development to support growth of the capital market inIndia. Some provisions of the Companies Act, MRTP Act, Capital Issues(Control) Act acted as a dampener of free growth of the market. The pricingof securities for issue was also subject to controls and regulations.

The Securities and Exchange Board of India, set up in 1988 underan administrative arrangement, given statutory powers with theenactment of SEBI Act, 1992 Capital Issues (Control) Act, 1947 repealed and the Office ofController of Capital Issues abolished; control over price and premium

of shares removed. Companies now free to raise funds from securitiesmarkets after filing letter of offer with SEBI SEBI introduces regulations for primary and secondary marketintermediaries, bringing them within the regulatory framework New reforms by SEBI in the primary market include improveddisclosure standards, introduction of prudential norms andsimplification of issue procedures. Companies required to disclose allmaterial facts and specific risk factors associated with their projectswhile making public issues.

January 1992 to March 1996*

Since 1991, the scenario has changed significantly with the initiation ofeconomic and financial reforms by the Government. As a natural corollary ofthe liberalisation and globalisation, the Indian Capital Market has undergonea sea change in terms of innovations, growth and de-regulation. A list ofseries of various major policy reforms and development in the securitiesmarket are as under:

Friday,March18,201112:38PM

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Disclosure norms further strengthened by introducing cash flowstatements Listing agreements of stock exchanges amended to require listedcompanies to furnish annual statement to the stock exchangesshowing variations between financial projections and projectedutilisation of funds in the offer document and at actuals, to enableshareholders to make comparisons between performance and

promises New issue procedures introduced - partial book building forinstitutional investors - aimed at reducing costs of issue SEBI introduces a code of advertisement for public issues forensuring fair and truthful disclosures The power to regulate stock exchanges delegated to SEBI by thegovernment SEBI reconstitutes the governing boards of the stock exchanges,introduces capital adequacy norms for brokers and issues rules formaking the client/ broker relationship more transparent, in particular,segregating client and broker accounts Over the Counter Exchange of India (OTC) set up withcomputerised on line screen based nation-wide electronic trading androlling settlement National Stock Exchange of India (NSE) set up as a stock exchangewith computerised on line screen based nation- wide electronic trading The Stock Exchange, Mumbai (BSE) introduces on line screenbased trading Capital adequacy requirement for brokers introduced

System of mark to market margins introduced on the stockexchanges "Revised carry forward" system introduced in place of "badla" National Securities Clearing Corporation Limited set up by the NSE SEBI frames regulations for mutual funds. Private mutual fundspermitted and several such funds have already been set up. All mutualfunds allowed to apply for firm allotment in public issues - also aimed atreducing issue costs SEBI introduces regulations governing substantial acquisition ofshares and take-overs and lays down the conditions under which

disclosures and mandatory public offers are to be made to theshareholders Indian companies permitted to access international capital marketsthrough Euroissues Foreign Direct Investment allowed in stock broking, assetmanagement companies, merchant banking and other non-bankfinance companies Foreign Institutional Investors (FIIs) allowed access to Indian capitalmarkets on registration with SEBI

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Guidelines for Offshore Venture Capital Funds announced by thegovernment SEBI strengthens surveillance mechanisms in SEBI and directs allstock exchanges to have separate surveillance departments SEBI strengthens enforcement of its regulations. Begins the processof prosecuting companies for mis-statements, issues show causenotices to merchant bankers, ensures refunds of application money in

several issues on account of mis-statements in the prospectus

SEBI advised stock exchanges to set up either Trade GuaranteeFund or Settlement Guarantee Fund to eliminate counterparty risk. Upper limit for gross exposure of member brokers of stockexchanges was fixed at 20 times the base minimum capital andadditional capital of the member broker. SEBI appointed Chandratre Committee on delisting of securitieswhich recommended exchanges to collect listing fees from thecompanies for three year period in advance. Besides, the companiesopting for voluntary delisting should mandatorily provide an exit routeto investors by offering buy-back facility to them. Theserecommendations were accepted and suitable directions were issuedto the stock exchanges. As on March 31, 1998, 20 stock exchanges in the country,accounting for almost 99.8 per cent of the total all-India turnover, hadshifted to on-line screen based trading. Rolling settlement of T+5 was made mandatory in the exchangeswhere trading in dematerialised securities was available since January

15, 1998. SEBI appointed J. R. Varma Committee on Modified Carry ForwardSystem which recommended a margin of 10 per cent on carry forwardtrades instead of earlier 15 per cent, enhancing the over all limit ofcarry forward trades by a broker to Rs 20 crore from the earlier limit ofRs 7.5 crore, removal of scripwise sub-limits on carry forward positionsand removal of limit of Rs 10 crore for badla financier. Therecommendations were accepted and suitable directions issued tostock exchanges. Brokers were permitted to warehouse trades for firm orders of the

Institutional clients. SEBI appointed a committee under the chairmanship of Shri G. P.Gupta to study the concept of market making and to revive theinstitution of market makers. The recommendations are awaited. R. Chandrasekharan committee had recommended adequate safetyand security features for security certification. The action for itsimplementation has been initiated. All stock exchanges were required to strengthen their InvestorProtection Fund and Investor Services Fund. The Stock exchanges

During 1997-98

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were advised to provide a special facility for attending investorcomplaints and dummy terminal for showing the on-line trades. SEBI appointed L. C. Gupta Committee which recommended theintroduction of derivatives trading in order to provide the facility ofhedging in the most cost-efficient way against market risk, andaccordingly action for its implementation was initiated. Settlement of trades in the depository was made compulsory from

January 15, 1998 in selected scrips for institutional investors namelydomestic FIs, Banks, Mutual Funds and FIIs having a minimumportfolio of securities of Rs 10 crore. SEBI appointed Working Group on Dematerlisation whichrecommended that securities in dematerialised form should be treatedas good delivery in the physical segment with effect from April 6,1998. Accordingly, action for implementation was initiated. The recognition of the Saurashtra-Kutch and Jaipur StockExchanges were further renewed for a period of one year. The Governing Board of Magadh Stock Exchange was superceededon account of its working. The stock exchanges were permitted to expand their tradingterminals to those cities where no other stock exchange was locatedsubject to compliance with certain conditions. As for the cities where astock exchange already existed, the exchanges seeking expansionwere required to enter into a MoU with the concerned stockexchanges. Accordingly, the Stock Exchange, Mumbai (BSE) waspermitted to expand outside Mumbai. Similar permissions were alsogranted to stock exchanges at Pune, Kolkata and Rajkot subject to

fulfilment of certain conditions by them. The Capital Stock Exchange Kerala Limited and the Inter-Connected Stock Exchange of India were granted "in-principle"recognition subject to compliance with certain conditions. 151 brokers from the 22 stock exchanges across the country wereinspected. There was a steep increase in registration of sub-brokers from 1798to 3760 i.e. by 109 per cent. SEBI permitted unlisted infrastructure companies making a publicissue of pure debt instruments/convertible debt instrument and

municipal corporations from the requirements of Rule 19(2)(b) ofSecurities (Contract) Regulation Rules, 1957, allowing them to list theirdebt instruments on the stock exchanges without the requirement forequity being listed first. The facility of book-building was extended to the entire issue size forissuer companies which propose to make an issue of capital of andabove Rs. 100 crore. A Committee was set up to examine the draft regulations on CreditRating Agencies prepared by SEBI and to recommend suitable

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modifications. Amendments were made to SEBI (Merchant Bankers) Regulations1992. Only body corporates were allowed to function as merchantbankers. Multiple categories of merchant bankers viz. Category II,III and IVwere abolished and henceforth there would be only one category ofmerchant bankers, i.e. Category I Merchant Banker. This new entity

shall undertake only those activities which are related to securitiesmarket including issue management activity and which do not requireregistration/have been granted exemption from registration as NBFCfrom the RBI. However, such entities shall have to seek separateregistration if they wish to act as underwriter or portfolio manager. Thatis, Merchant Bankers would now require separate registration to act asunderwriters as well as portfolio managers. Merchant Bankers were prohibited from carrying on fund-basedactivities other than those related exclusively to the capital market. SEBI (Registrars to an Issue and Share Transfer Agents)Regulations, 1993 have been amended to provide for an arms lengthrelationship between the issuer and the Registrar to the Issue. SEBI appointed a Committee under the Chairmanship of Dr S.A.Dave to draft the Regulations on Collective Investment Schemes. Untilthe Regulations were notified, the provisions of Section 12(1)(B) ofSEBI Act prohibited any new scheme to be sponsored or further fundto be raised by the existing collective investment scheme. Further,SEBI stipulated that all existing schemes would continue to mobilisefunds only after obtaining a rating from any of the recognised Credit

Rating Agencies. It was decided that all advertisements by existingcollective investment schemes would adhere to the advertisementcode prescribed by SEBI. The Securities and Exchange Board of India (Mutual Funds)Regulations, 1996 were amended to address certain issues that areimportant for investor protection. Aggregate investments by a mutual fund in listed or to be listedsecurities of group companies of the sponsor would not exceed 25 percent of the net assets of all schemes of the fund. Securities transactions with associate brokers would not exceed 5

per cent of the quarterly business done by the mutual fund. Unitholders approval would no longer be required for rollover ofschemes and for converting close-ended schemes into open-endedones, provided the unitholders were given the option to redeem theirholdings in full at NAV based prices. Independent trustees who are not associated with the sponsor shallnow constitute two-thirds of the Board of Trustees instead of earlierprovision of 50 per cent. SEBI gave an option to the issuers to fix the minimum marketable

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lot on the basis of offer price subject to the condition that themarketable lot shall not be more than 100 shares. A Committee was set up under the Chairmanship of Mr P.K. Kaul torecommend the manner of discharge of responsibilities by the trusteesas laid down in regulation 18 of SEBI (Mutual Funds) Regulations,1996. The report of the Committee is awaited. SEBI set up a working group to work out the modalities and

guidelines for investment by domestic mutual funds in overseasmarkets. SEBI regulations for merchant bankers, stock brokers, registrars toan issue, portfolio mangers, underwriters, debenture trustees, bankersto an issue, custodian of securities, depositories, venture capital fundswere amended to specifically include the concept of "fit and properperson" in their eligibility criteria that an applicant should be a fit andproper person. SEBI appointed Justice D.R. Dhanuka Committee which submittedits interim recommendations in respect of working draft of theCompanies Bill, 1997. SEBI (Annual Report) Rules has been amended to such that SEBIshall submit Annual Report to the Central Government within 90 daysafter the end of each Financial Year instead of 60 days.

During 1998-99

To eliminate the risks associated with trading in physical securitiessuch as delay in transfer, bad delivery, theft, fake and forged shares,several new, and far reaching initiatives were taken by SEBI to

accelerate dematerialisation and electronic book entry transfer ofsecurities Compulsory trading in dematerialised form introduced for the firsttime for all investors in a phased manner in shares of selectedcompanies which are most actively traded the list of companies whose shares are to be compulsorily traded indematerialised form by institutional investors expanded to cover almostall the actively traded shares accounting for more than 90 per cent ofthe trading volume the Central Depository Services Ltd., a new depository promoted by

the BSE and a few commercial banks granted certificate ofcommencement of business the market lots abolished for shares of companies compulsorilytraded in dematerialised form by all investors the facility of selling small quantities of shares in the physical form ofeither 500 in number or Rs.25000 in value being introduced in thestock exchanges, to help investors having small holdings to dispose offtheir holdings easily.

Dematerialisation of Securities

Derivatives Trading

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To provide the facility of hedging and enhance the liquidity in themarket, the committee appointed by SEBI on derivativesrecommended phased introduction of trading in derivative productsbeginning with trading in stock index futures, accepted by SEBI. Theintroduction of derivatives is awaiting the amendment of SCR Act. The recommendations of the J.R. Verma Committee for riskcontainment measures for derivative trading including margin system

accepted by SEBI.

To help increase the liquidity in the securities and to enablecompanies to enhance the wealth of shareholders, the facility of buy-back of securities by listed companies introduced for the first time.

Buy-back of Securities

To give the flexibility to the companies to issue shares at anyamount and to extend free pricing to its logical conclusion and tobenefit the investors, the current requirement for issuing shares with afixed par value of Rs.10 or Rs.100 abolished for companies whoseshares are dematerialised.

Par Value of Shares

To provide incentives to employees, the J.R. Verma Committee wasconstituted by SEBI to formulate the Guidelines for Employee StockOptions and Employee Stock Purchase Scheme. The Board hasconsidered and accepted the recommendations of the Committee andthe Guidelines are being issued.

Employees Stock Option Scheme

To facilitate increased raising of funds by infrastructure companies,

SEBI granted several relaxations and exemptions from the existingrequirements. These are given below: Exemption from fulfilling eligibility norms. Exemption from meeting profitability norms for free pricing ofissues subject to fulfillment of certain conditions. Exemption from the requirement of offering at least 25 per cent ofsecurities to public. Exemption from the requirement of the minimum number of 5shareholders for every Rs.1 lakh of capital issued. Exemption from the requirement of minimum subscription of 90 per

cent of public offer. Relaxation from requirement of minimum financial participation byappraising agency a minimum participation of 5 per cent of theproject cost can be made either jointly or severally by the specifiedinstitutions, irrespective whether they have appraised the project ornot.

Facilitating the Development of Infrastructure

To improve the continuing disclosure standards for companies forquicker dissemination of information to investors, quarterly disclosure

Continuing Disclosures

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of financial results by listed companies made mandatory for the firsttime by SEBI through the amendment of the listing agreement, thustaking India to the select list of countries with similar continuingdisclosure requirement. Continuing disclosures further enhanced by the introduction of therequirement of immediate disclosure of any material event in acompany having a bearing on the performance of the company and

price sensitive information.

To strengthen the credibility of the ratings of credit rating agenciesand enhance the transparency in their reporting and informationsystem, the recommendations of SEBI appointed Committee accepted.

Credit Rating Agencies

To protect the interest of investors in Collective InvestmentSchemes and in accordance with the mandate given by theGovernment, SEBI initiated the process of framing the regulations forcollective investment schemes. To protect the interest of the investors,in the interim period, SEBI took several measures with a two prongedapproach to discipline and take action against erring entities and at thesame time to educate the investors about the risks associated withinvesting in unregulated schemes. The action taken by SEBI includedissuing show cause notices to defaulting entities, initiating courtproceedings to obtain appropriate relief in the interest of the investors,conducting a special audit of the books of accounts of the largerentities, making credit rating mandatory for existing schemes,disseminating information to the investors through the issue of press

releases/public notices etc.

Collective Investment Schemes

To help lower issue cost and time for making public issues and alsoto simplify procedures, the ceiling of issue size of Rs.100 crore forbook-building reduced to Rs.25 crore. To bring down the cost involved in public issues, SEBI modified therequirement of mandatory collection centres. The minimum number ofcollection centres for an issue of capital shall be (a) the fourmetropolitan centres and (b) such centres where the stock exchangesare located in the region in which the registered office of the company

is situated. To encourage the mobilisation of capital by new companies, theentry norms for IPOs further relaxed by substituting the requirement ofactual payment of dividend in three out of five preceding years, with theability to pay dividend as demonstrated by distributable profits inaccordance with the provisions of the Companies Act in at least threeout of five preceding years. To improve the liquidity and to encourage entrepreneurs to raisecapital through public issues, the requirement of the lock-in period of

Relaxation of Norms for IPOs

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promoters contribution in full reduced to only 20% of the total capital ofthe company. To help investors make informed investment decisions, credit ratingby approved credit rating agencies made mandatory for all public andrights issues of debt instruments irrespective of their maturity orconversion period as against exemption granted for 18 months. To facilitate floatation of issues by public and private sector banks,

relaxation made in the Disclosure and Investor Protection guidelines ofSEBI for the issue of capital, subject to the approval of the issue priceby the RBI, as banks are under the regulatory purview of RBI.

To enhance the transparency in the secondary market, automatedscreen based trading which was introduced in 20 stock exchangesextended to the remaining 3 more stock exchanges to achieve 100 percent coverage of automated trading. To enhance transparency of negotiated deals, stock exchangesdirected to ensure that all negotiated deals result in delivery and dealsof value of Rs.25 lakh or volume of 10,000 shares are reported on thescreens within 15 minutes of transaction and disseminated to themarket. To increase the competitiveness in the market and prevent marketabuse, the facility of "all or one" available in the trading system of thestock exchanges was abolished.

Secondary Market Transparency

To increase market access for investors across the country, theStock Exchange Mumbai and the National Stock Exchange (NSE)

further expanded their terminals through VSAT to cover more than 250cities and towns. To increase the access of Indian securities market to NRIs, OCBsand FIIs, the Indian stock exchanges permitted to set up their tradingterminals overseas subject to regulatory requirements of the hostcountries.

Increase in Market Access

In order to strengthen the disclosure by mutual funds, standard offerdocument and abridged offer document introduced . Several mutual funds directed by SEBI to honour their commitment

to the investors in assured return schemes thus benefiting millions ofinvestors. By the end of March 31, 1999 the total amount paid toinvestors was Rs.1350 crore. To ensure that the Trustees discharge their responsibilities moreeffectively, the report of SEBI-appointed Committee under thechairmanship of Shri P.K. Kaul, former Cabinet Secretary submitted toSEBI.

Mutual Funds

To ensure that settlements take place without failure and to reduceMarket Safety and Risk Containment Measures

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counter party risk, 10 major and medium stock exchanges have set uptrade / settlement guarantee funds measuring an increase of 6exchanges with an amount of Rs.1000 crore . To protect market integrity especially under conditions of abnormalprice movement and to contain extreme volatility, margin systemstrengthened by SEBI in consultation with the stock exchanges byintroducing additional volatility margin, incremental margin for carry

forward transaction and concentration margin coupled with reduction ofdaily price bands from 10 per cent to 8 per cent and abolition of weeklyprice bands.

To help ensure real time monitoring of price movements and brokerpositions and to generate real time alerts, 4 major and medium sizedstock exchanges implemented the first phase of the Stock WatchSystem. Several enforcement actions taken against intermediaries forvarious violations of the provisions of SEBI Act and rules andregulations and also for market manipulation and unfair trade practices.

Monitoring, Surveillance and Effective Prevention of Market Manipulation

To help sustain the activities of smaller stock exchanges, the InterConnected Stock Exchange of India set up by 14 regional stockexchanges, commenced trading operations in a limited way

Consolidation of Smaller Stock Exchanges

Foreign Institutional Investors FIIs permitted to directly participate in the public offers in takeover andbuyback offer of companies. Procedural simplification introduced for registration and operations of

the FIIs and the Sub-accounts.

To further protect the interest of investors in takeovers and toenhance equity, fairness and transparency in takeover transactions,the interim recommendations of the reconstituted Committee under thechairmanship of Justice P.N. Bhagwati, former Chief Justice of Indiaaccepted. The threshold limit for mandatory public offer increased from 10 percent to 15 per cent of the voting rights of a company. The creeping acquisition limit raised from the earlier level of 2 per

cent to 5 per cent of the voting rights and also made applicable topersons holding above 51 per cent of voting rights up to 75 per cent.

Takeovers and Substantial Acquisition of Shares

During 1999-2000

The entry point norms for Initial Public Offer (IPO) which form a partof the Disclosure and Investor Protection Guidelines (DIP) relaxed forcompanies in the Information Technology (IT) sector to enable thesecompanies to list their shares by making public offer of 10 per cent ofpost issue capital instead of 25 per cent for other sectors, subject to

Streamlining of the Disclosure and Investor Protection Guidelines

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requirements of minimum number of 20 lakh securities and minimumnet offer value of Rs.30 crore. This will encourage IT companies tocome to the market. The requirement of "ability to pay dividend" substituted for "actualpayment of dividend", in the entry point norms for public offers. This willfurther strengthen the guidelines. The DIP guidelines made common for all Initial Public Offers (IPOs)

made common in the wake of abolishing of the concept of fixed parvalue. This will help streamline the guidelines.

The revised guidelines for employees stocks options schemesbased on recommendations of committee appointed by SEBI under J.R. Varma were implemented.

Employee Stock Options Scheme

The issuers given the option to build either by 90 per cent of the netoffer to the public or 75 per cent of the net offer to the public. Thebalance issue to be offered to the public at the fixed pricedetermined through book-building exercise. This procedure is in linewith the international practices and will aid price discovery andstreamline the process of book-building. The 15 per cent reservation for individual investors bidding up to 10marketable lots, merged with 10 per cent at fixed price offer. This willfurther streamline the process of book-building.

Book-Building

The regulations for CRAs notified. This will bring the CRAs under aregulatory framework for the first time.

Credit Rating Agencies (CRAs)

The Securities Law (Amendment) Bill, 1999 was passed by theParliament facilitating the regulation of Collective Investment Schemes(CIS) and expanding the definition of securities to include units of CIS.This will help SEBI to regulate the CIS and protect the interest ofinvestors in these schemes.

the issue of advertisements to warn investors of danger ofinvesting in unregulated CIS and to notify all CIS that their

registration of all CIS with SEBI is mandatory and allowing the launching of new CIS schemes only after obtainingthe rating from a CRA.

Several other measures earlier taken by SEBI to protect investorsincluded:

Collective Investment Schemes (CIS)

Following the acceptance of the recommendations of the Committeeon Market Making appointed by SEBI, guidelines were issued to thestock exchanges to allow brokers to take up market making activity inshares of a company where the average number of trades is more than50 and the value of trade on daily basis is more than Rs.10 lakh.

Market Making

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The facility of marketing IPOs through the use of the availableinfrastructure of stock exchanges permitted by SEBI to be introducedby the stock exchanges. This will help reduce issue and distributioncosts for public issues, reduce delays and speed up allotment.

Marketing Initial Public Offer (IPO) through Secondary Market

Internet trading under order routing system permitted for the first

time in a limited way through registered stock brokers on behalf ofclients for execution of trades on recognized stock exchanges. This willfurther modernize the trading system.

Internet Trading

The long prevalent system of negotiated deals on the stockexchanges (i.e. any transaction which either has a value of Rs 25 lakh /the traded volume is not less than 10,000 shares) which were nontransparent and had become the source of much abuse was abolishedby SEBI, and guidelines issued by SEBI permitting such deals only ifthey are executed on the on the screen on the price and ordermatching system of the exchanges, like any other deal. This willintroduce transparency and price discovery in negotiated deals andprotect better the investors.

Negotiated Deals

Phased programme of T+5 rolling settlement introduced for the firsttime, in 10 scrips from January 10, 2000, and another 34 scrips fromMarch 21, 2000 after shortlisting the scrips on the basis of the criteriathat these scrips should be on the list for compulsory dematerialisedtrading and have a daily turn over of about Rs 1 crore and above. This

important measure will increase the efficiency of market microstructure

Rolling Settlement

The existing margin system further refined and strengthened toenhance the safety of the market.

Measures For Safety And Stability In Stock Market

The list of scrips to be traded compulsorily in dematerialised form byinstitutional investors increased in phases to 462 by the end of thefinancial year and further announcement made for increasing the list to985 by June 26, 2000; a similar list of scrips for all investors increasedto 260 by the end of the year and announced to be increased to 579 by

June 26, 2000. Procedures for processing of dematerialised requests and openingof accounts for beneficial owners by the depository participantsstreamlined and facility of simultaneous transfer and dematerialisationintroduced. Share transfer agents allowed to act as depository participants. The ceiling on the value of the portfolio of securities held in custodyby the broker depository participants increased to 100 times the networth of the broker.

Dematerialisation of Shares

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'No delivery period for scrips under compulsory dematerialised formby all investors reduced to one week. Additional measures taken to enhance the safety standards of thedepository system. Trading of new IPOs compulsorily in de-materialised form by allinvestors immediately upon listing.

A Committee was appointed by SEBI under the chairmanship ofShri Kumar Mangalam Birla, member SEBI Board, to enhance thestandard of corporate governance. The draft Report of the Committeewas widely circulated and deliberated. The recommendations wereaccepted by SEBI Board and implemented by SEBI through theamendment of the listing agreement of the stock exchanges. Therecommendations applicable first to all the listed companies which areincluded either in group A of the BSE and in S&P CNX Nifty index ason January 1, 2000 to be completed by March 31, 2001 and in thesubsequent years to other companies in a phased manner. This willsubstantially enhance the standard of corporate governance in India.

Corporate Governance

The cash flow statement as per the listing agreement required to bemandatorily prepared in accordance with the relevant accountingstandard. Additional disclosures to be made in the unaudited financialquarterly results of the companies to make these more transparent andmeaningful. Limited review by auditors for half-yearly results.

Prior intimation about Board Meeting at which declaration ofdividend is considered to be made at least seven days in advance. Announcement by the companies on dividend, rights etc. to bemade only after the close of the market hours to avoid excessivevolatility in stock prices.

Financial Disclosure

Listing of debt securities relating to infrastructure and municipalcorporation allowed before equity, subject to the condition that the debtinstrument is rated not below a minimum rating of A or equivalentthereof.

Listing of debt before equity

FIIs allowed to directly participate in the public offer in takeover andbuy-back offer of companies. Foreign corporate or high networth individual investors allowed toinvest as sub-account to widen the base of FIIs provided providentinvestment does not exceed 5 per cent of total issued capital ofcompany.

Foreign Institutional Investors (FIIs)

Investment by Mutual Funds in the equity shares or equity relatedMutual Funds

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instruments of a single company in a single scheme restricted to 10 percent of the NAV of the scheme and investment in index schemes to 15per cent of NAV of the scheme to allow for diversification ofinvestments by mutual funds. The limits can be extended to 25 percent of the NAV of the scheme with the prior approval of the board ofthe asset management company and board of trustees. Investment in unlisted shares by mutual funds not to exceed of 10

per cent of the NAV of a scheme, in case of close ended scheme and 5per cent of the NAV of the scheme in case of open-ended schemes. Investments by mutual funds in debt instruments issued by a singleissuer which are rated not below investment grade restricted to 15 percent of a scheme, but could be extended to 20 per cent with the priorapproval of the boards of the asset management company andtrustees. Investment in un-rated debt instrument of a single issuer in ascheme restricted to 10 per cent of the NAV of the scheme which couldbe increased to 25 per cent of NAV subject to approval of the boards ofthe asset management company and trustees. Following the recommendations of the P.K. Kaul Committee whichwere accepted by SEBI Board , the tustees of mutual funds required tofile the details of his transaction relating to buying and selling ofsecurities with the mutual fund on a quarterly basis and due diligenceis required to be carried out by the trustees in fulfilment of the variousobligations as required under the regulations.

The recommendations of the Committee appointed by SEBI underthe chairmanship of Shri Chandrashekhar, for developing the venture

capital industry, were accepted by SEBI Board. Theserecommendations would go a long way in helping the growth of venturecapital in India.

Venture Capital Funds

During 2000-01

To ensure availability of adequate information to investors, theguidelines issued to companies to disclose the details of utilization anddeployment of unutilized part of promoters contribution, firm allotmentand reservation in their balance sheet. Similar requirements alsospecified in case of monies accrued to the company as a result of a

preferential issue. Companies required to indicate the purpose forwhich such monies are utilised and the form in which such unutilisedmonies have been invested. To address apprehensions about an overly optimistic futureperformance by the company, no forecast or projections relating tofinancial performance of the issuer company to be given in the offerdocument.

Streamlining of the Disclosure and Investor Protection Guidelines

Book-buildingTo further strengthen the book-building and to rationalise the existing

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100 percent one stage book-building permitted with bidding centresat all cities having stock exchanges.

60 percent to be allocated to institutional investors such as

banks/FIIs and other financial institutions and at least 15 percent tobe distributed on proportionate basis to non-institutional investorsapplying for more than 1000 shares and The remaining 25 percent of shares to be available to smallinvestors.

The provision of 75 percent of the issue to be offered through book-building of which:

provisions of book-building guidelines and to introduce greatertransparency in the book-building process, following guidelines issued

Entry Norms and Book Building

Issuers not having net-worth of Rs. 1 crore and distributable profitsin 3 out of the immediately preceding 5 years or proposing to raisemore than 5 times its pre-issue net worth, required to make issues tobe compulsorily through book-building route offering 60 percent toQualified Institutional Buyers (QIBs). Institutional investors under the category of QIBs like banks, FIIs,

mutual funds and other financial institutions to be allocated not morethan 60 percent of the book-built portion.

Book building process further used to strengthen and streamline the entrypoint norms for public issues and to help investors make better judgementof quality and price of the issue on the assumption that QIBs who wouldbe subscribing first to the offer under the book building have ability toassess the quality of the investment and their investment decision wouldeffectively amount to a market appraisal of the quality and price of theissue.

To safeguard investors interest, guidelines on preferential allotmentmodified requiring companies to include detailed disclosures in theexplanatory statement in the notice for the general meeting or AGM ofthe shareholders. viz. objective of the issue and intention of promoters,directors, key management persons, shareholding pattern etc. Lock-in period of one year from the date of allotment stipulated forinstruments allotted on preferential basis to any person including

promoters/promoter group except for such allotments which involveshare swap for acquisitions.

Preferential Allotment Disclosures and Lock-in

To ensure promoters association and commitment to company andto enhance investors confidence in public issues of unlistedcompanies, the minimum promoters contribution of 20 percent forunlisted companies required to be locked-in for 3 years and thebalance of the entire pre-IPO capital to be locked in for 1 year from thedate of commencement of commercial production or the date of

Promoters Contribution and Lock-In

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allotment in the public issue which ever is later.

To eliminate the problems relating to loss of allotment letters, sharecertificates, etc., and to induce the investors to opt for allotment ofdematerialised shares , the trading for all IPOs in dematerialised formmade compulsory with an option available to the investors for physicalshares.

IPOs in Dematerialised Mode

To help the development of debt market and to provide a widervariety of debt instruments SEBI (Disclosure and Investor Protection)Guidelines, 2000 amended to allow issuers to issueunsecured/subordinated debt instruments with maturity of less than 18months in the nature of mezzanine capital.

Guidelines for Issue of Debt Instruments

To reduce issue costs as well as time taken in public issues,guidelines issued for offering securities in public issues through thestock exchange mechanism, giving the issuers the option to issuesecurities through the on-line system of the stock exchange or throughthe existing banking channel.

Public Issues Through Stock Exchange Mechanism

To speed up the listing process, in-principle approval from the stockexchanges for listing of securities required to be obtained by the leadmerchant banker within 15 days of filing of the offer document with thestock exchange. To ensure speedier completion of the issue process, and tominimize the risks associated with volatile markets, the time for

finalising allotment reduced from 30 to 15 days in book-built issues andthe period between finalisation of basis of allotment and listing reducedto 7 working days to impart quicker liquidity to the investments made inprimary issues. To ensure that investors get the shares/refund orders quickly, thedespatch of share certificates/refund orders/cancel stock invest anddemat credit required to be completed within two working days offinalisation of the basis of allotment, in place of present requirement of30 days. To further simplify the present allotment procedure, market lots

replaced with simple proportionate allotment to the applicants in therespective categories. To prevent fractional allotments and allotmentsof miniscule value, the minimum allotment to be higher of the following:a) one share or b) smallest integral number of shares that have a valueof Rs. 1000/- calculated on the basis of issue price.

Allotment Procedure

Indian companies in information technology, media,

To encourage companies in the new economy while ensuring goodquality issues with sufficient stock available for trading:

Relaxation of Minimum Offer to Public

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entertainment and telecom sectors permitted to access the marketswith a minimum offer of 10 per cent of post-issue capital to thepublic subject to a minimum offering of 20 lakh shares for theamount of not less than Rs.50 crore. This relaxation subsequentlyextended to all companies with the same conditions and the issuesize increased from Rs. 50 crore to Rs. 100 crore. The restriction of minimum public issue size of Rs. 25 crore in

case of an IPO through book-building removed for all companies.

The present facility of listing of debt securities of infrastructurecompanies and municipal corporations without having listed theirequity, extended to all companies subject to investment grade creditrating, promoterscontribution of 20 per cent, three years lock-in,maintaining same standard of continuing disclosures, no partly paid-upshares/ other securities, and book-building option, etc.

Listing of Debt Before Equity

Financial Disclosures Requirements for Issuers and Other Entities

The unaudited financial quarterly results of the companies mademore transparent and meaningful, additional disclosure normsprescribed and half-yearly results subjected to a limited review by theauditors, The issuers required to prepare cash flow statement referred to inthe listing agreement in accordance with relevant accounting standard The issuers required to disclose materially significant transactions,i.e., transactions of the company of material nature, with its promoters,the directors or the management, their subsidiaries or relatives, etc.

which may have potential conflict with the interests of issuers at large, The public disclosure of details of non-compliance, penalties,strictures imposed by the stock exchange or SEBI or any matter ofcompany related to the capital market during the last three yearsrequired; and separate disclosure for all material on non-recurring/abnormal income/gain and expenditure/loss and effect of allchanges in accounting practices affecting the profits materially, All stock exchanges and subsidiaries of stock exchanges, clearingcorporations advised to post their annual accounts in their respectivewebsites, besides making available a copy of their annual accounts to

investors, intermediaries and general public. Valuation methods standardised for net asset value of mutual fundsfor debt securities, thinly traded and non-traded debt and equities. The ICAI issued accounting standards for consolidation of accounts,segment reporting, related party transactions, deferred tax liability. These standards will be mandatory for all listed companies as perthe phased programme of corporate governance issued by SEBI.

To strengthen the financial disclosures norms for the listed entities:

The recommendations of the Kumar Mangalam Birla Committee onCorporate Governance

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Price band for 200 scrips and scrips under compulsory rollingsettlement, was relaxed to 16 per cent. Scrip limit in carry-forward position in Modified Carry-ForwardSystem (MCFS) or the trade position in Automated Lending andBorrowing Mechanism (ALBM) was fixed at Rs 5 crore per scrip permember in account period and also in rolling settlement, and theexposure limit was fixed at Rs. 4 crore per broker.

No volatility margin in compulsory rolling settlement system. Cash component to be minimum at 30 per cent of the total margin,to be deposited by the broker. To encourage delivery based transactions, the margins to beprovided only in the shape of bank guarantees and cash componentneed not be insisted. Several measures taken following the events in the stock market inMarch 2001.Price Band:B.To further strengthen the risk management system the followingmeasures adopted: The price bands initially placed at 8 per cent such that once a scriptouched the 8 percent price band in either direction, the trading in thatscrip to be restricted upto the price band for half an hour, andthereafter, the price band to be further relaxed by 4 percent in thedirection in which the price moved to touch the ceiling . The relaxation of the price band could only be done at BSE or NSE.The other exchanges to relax the price band (by 4 percent ) only aftersuch relaxation is applied at BSE or NSE.

Subsequently, the price band was relaxed by further 8 per cent for200 actively traded scrips jointly decided by BSE and NSE. Following the events in the securities markets in March 2001 alltransactions to be backed by delivery unless the sale transaction hasbeen preceded by a purchase position of at least an equivalent amountin the name of the same client in the same or any other exchanges.This restriction was temporary, to be removed depending on thecondition of the market.

To help establish the identity of buyers and sellers of securities and

to improve and facilitate market surveillance, the client code mademandatory at the brokers level operating on all the stock exchanges. The unique client code also to be introduced across exchanges.

Mandatory Client Code

No-delivery period of seven days abolished for companies whosesecurities are traded in the compulsory dematerialised mode.

Abolition of No - Delivery Period

Code of ethics for directors and functionaries of stock exchangesintroduced to raise the professional and ethical standards of

Code of Ethics for Directors and Functionaries of Stock Exchanges

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secondary and primary market operations, imparting education onradio and television.

A common format prescribed for all Mutual Fund schemes todisclose their entire portfolios on half yearly basis so that the investorscan get meaningful information on the deployment of funds. MutualFunds also required to disclose the investment in various types of

instruments and percentage of investment in each scrip to the totalNAV, illiquid and non performing assets, investment in derivatives andin ADRs and GDRs. To bring about transparency in the investment decisions, andensure due diligence of the AMCs in their investment of public funds,all the AMCs directed to maintain records in support of eachinvestment decision which would indicate the data, the facts and otherrelated opinion leading to an investment decision. Further the AMCs required to record the basis for taking individualscrip-wise investment decision in equity and debt securities and reportits compliance in their periodical reports to the trustees. After checkingits compliance through independent auditors or internal/statutoryauditors, the trustees required to report to SEBI in their half-yearlyreports. To enable the investors to make informed investment decisionsguidelines issued to mutual funds to fully revise and update offerdocument and memorandum atleast once in two years.

bring uniformity in disclosures of various categories of

advertisements, with a view to ensure consistency andcomparability across schemes of various mutual funds, reduce initial offer period from a maximum of 45 days to 30 days, despatch statements of account once the minimum subscriptionamount specified in the offer document is received even before theclosure of the issue, invest in mortgaged backed securities of investment grade byCredit Rating Agency, identify and make provisions for the non-performing assets(NPAs), according to criteria for classification of NPAs and

treatment of income accrued on NPAs and to disclose NPAs in halfyearly portfolio reports, disclose information in a revised format on unit capital, reserves,performance in terms of dividend and rise / fall in NAV during thehalf year period, annualized yields over the last 1, 3, 5 years inaddition to percentage of management fees, percentage of recurringexpenses to Net Assets, investment made in associate companiesand payment made to associate companies for their services,details of large holdings etc. since their operation

Mutual funds also required to:

Mutual Funds

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The exchanges were asked to monitor the positions of theirmembers, phased liquidation of their positions between July 02,2001 to September 03, 2001.

Liquidation of outstanding positions as on July 02, 2001, wasallowed only for the approved deferral products in the rollingsettlement.

To enhance the efficiency of the secondary market, rollingsettlement was introduced for additional 251 scrips from July 02, 2001bringing the total number of scrips under rolling settlement to 414. Thestocks, which were not under compulsory rolling settlement from July02, 2001, were traded under compulsory rolling settlement with effectfrom January 02, 2002. It was also decided to further shorten thesettlement cycle to T+3 for all listed securities from April 1, 2002.

Rolling Settlement and Shortening of Settlement Cycle

To bring about a co-ordinated trading halt in all equity and equityderivative markets nationwide, SEBI implemented an index-basedmarket-wide circuit breaker system, applied at three stages of theindex movement either way at 10 per cent, 15 per cent and 20 per centwith effect from July 02, 2001.

Index- based market-wide circuit breaker in compulsory rolling settlement

Scrip-wise VaR and index-based VaR calculation by theexchanges for additional 251 scrips included in compulsory rolling

settlement from July 02, 2001 and 15 scrips having the facility ofCNS, CFRS, ALBRS and BLESS. In addition to the above, additional level of margin was imposedto address the 1 per cent of the cases to supplement VaR basedmargins. Additional 12 per cent margin imposed to address 1 per cent ofthe cases. The VaR calculations based either on BSE Sensex or S & P CNXNifty and other exchanges may calculate their own VaR or followBSE or NSE pattern.

The VaR based margin capped at 100 per cent. The VaR based margin calculated by the exchange at the end ofthe day to be used for the purpose of margin calculations for thetransactions carried out next day. The VaR based margin to be collected on T+1 basis. In addition to margin calculated on VaR basis, exchanges tocollect mark-to-market margin. Exchanges to impose additional margin on scrips whenevernecessary to contain the risk in the market.

To contain the risk associated with scrips in compulsory rollingsettlement, the 99 per cent VaR based Margin System was introducedfrom July 02, 2001 as under:

Margin based on VaR.

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To facilitate short selling, all restrictions which were temporarilyimposed were removed. SEBI withdrew the restrictions on short saleswith effect from July 02, 2001.

Withdrawal of restriction on short sales

To facilitate the use of stock lending following the introduction ofrolling settlement in 414 scrips from July 2, 2001 and the ban on all

deferral products such as ALBM/BLESS/MCFS/CNS, the restrictionson the Securities Lending Scheme, 1997 were withdrawn.

Securities Lending Scheme, 1997

To introduce scrip-wise price band, SEBI decided that in addition tothe market-wide index based circuit filters, there would be individualscrip-wise price bands of 20 per cent either way, for all scrips in thecompulsory rolling settlement except for the scrips on which derivativesproducts are available or scrips included in indices on whichderivatives products are available. While in the rest of the scrips thatare not in compulsory rolling settlement, the existing price bands wouldcontinue to apply. Further post-September 11, 2001, as a temporary measure formarket stability, a price band of 10 per cent was introduced on allshares on which derivative products are available.

Scrip-wise price bands

To reduce the risk in trading of Options on Stocks, SEBIimplemented the following measures on the basis of the frameworkconsistent with the risk management guidelines recommended by theL.C. Gupta Committee. Also, the exchanges were allowed to decide

whether they want to adopt any of the risk management modelsavailable globally or else may like to develop their own models for riskmanagement. The Stock Option Contracts to be traded on the derivativeexchange/ segments shall have prior approval of SEBI. The Contractshould comply with the disclosure requirements, if any, laid down bySEBI. The exchange to introduce Premium Settled American Style StockOptions, which shall be settled in cash at exercise, for an initial periodof six months, thereafter, the Stock Options, at exercise, shall be

settled by delivery. The Stock Option Contract to have a minimum contract size of Rs. 2lakh at the time of its introduction in the market. The Stock Option contract to have a maximum maturity of 12months and shall have a minimum of 3 strikes (in the money, near themoney and out of the money). The initial margin requirements to be based on worst case of loss ofa portfolio of an individual client to cover 99 per cent VaR over a oneday horizon. The initial margin requirement shall be netted at level of

Risk containment measures for Stock Option

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individual client and it shall be on gross basis at the level ofTrading/Clearing Member. The initial margin requirement for theproprietary position of Trading/Clearing member shall also be on netbasis. A portfolio based margining approach to be adopted which will takean integrated view of the risk involved in the portfolio of each individualclient comprising of his positions in derivative contracts.

Exchanges to disclose scrip-wise deliverable positions grossedacross clients for that day s trading session in the specified format.

To allocate ID to their investor clients, all brokers were directedthrough the stock exchanges to provide a unique ID to every investor.It was made mandatory for all brokers to use unique client codes for allclients. For this purpose, brokers were advised to collect and maintainin their back office the Permanent Account Number (PAN) allotted byIncome Tax Department for all their clients. Sub-brokers will similarlymaintain for their clients. Where an individual client does not have PANnumber, such a client shall be required to give a declaration to thateffect. For FIIs, (where FII, itself is the investing entity) and their sub-accounts, SEBI registration number of FIIs and sub-account to be useduntil the PAN No. is allotted. For tax paying body corporate, the unique registration numberissued by the relevant regulatory authority to be used till the time thePAN is allotted. The stock exchanges to be required to maintain a database of client

details submitted by brokers. Historical records of all quarterlysubmissions shall be maintained for a period of seven years by theexchanges.

Unique client code

To enhance the level of continuous disclosure by the listedcompanies in the light of new Accounting Standards issued by theInstitute of Chartered Accountants of India (ICAI), SEBI decided toamend the Listing Agreement to incorporate the segment reporting,accounting for taxes on income, Consolidated Financial Results,Consolidated Financial Statements, Related Party Disclosures and

Compliance with Accounting Standards.

Amendment to the Listing Agreement

To further develop the derivative market and to increase theavailability of products, futures on 31 stocks, in which options contractshad been permitted by SEBI was introduced. As risk containment measures, SEBI adopted the existing riskmanagement framework in the derivative market for Single StockFutures. A portfolio based margining was adopted taking into account an

Single Stock futures and the Risk Containment Measures

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integrated view of the risk involved in the portfolio of each individualclient comprising of his positions in all derivative contracts i.e. IndexFutures, Index Option, Stock Options and Single Stock Futures.

To remove the influence of brokers in the functioning of stockexchanges, SEBI decided that no broker member of the stockexchanges shall be an office bearer of an exchange or hold the

position of President, Vice President, Treasurer etc. and amendment tothe Rules, Articles, Bye-laws of the stock exchanges were in theprocess of being amended.

Demutualisation of the Stock Exchanges

To permit FIIs to trade in all exchange traded derivative contracts,SEBI prescribed position limits for trading by FIIs and their sub-accounts. The FIIs were also permitted by the RBI to trade in allexchange derivative contracts subject to the prescribed position limitfor them and their sub-accounts. They are also required to comply withthe procedure of trading, settlement and reporting as prescribed by thederivative exchange/clearing house/clearing corporation from time totime.

FIIs Trading in all exchange traded derivative contracts

To facilitate the settlement, SEBI prescribed the compulsorydematerialised trading by companies through connectivity with both thedepositories. If the companies fail to establish connectivity with boththe depositories from the due date, the trading will be on the "Trade forTrade" settlement window of the exchanges from the followingsettlement period.

Trading and Settlement in Dematerialised Securities

SEBI amended the Take-over Regulations to facilitate disinvestmentof government shareholding in the listed Public Sector Undertakings. SEBI increased the creeping acquisition limit available forconsolidation of existing holdings from 5 per cent to 10 per cent whichwould be available upto September 30, 2002, subject to review.

Takeovers

To provide investors with meaningful information about theoperations of the mutual fund schemes and to help them in taking wellinformed investment decision; SEBI revised and simplified the present

format for un-audited half-yearly results. The mutual funds were askedto disclose performance in terms of rise/fall in NAV, yield, investmentmade in associate companies, details of large holding etc. All Mutual Funds were directed to post their half-yearly results in theprescribed format on their web sites and for investors the same may bedisplayed on AMFI web site before the expiry of one month from theclose of each half-year. To make the monitoring more broad based, the Mutual Funds wererequired to disclose the portfolios on their web sites in the prescribed

Mutual Funds

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Implementation of T+3 rolling settlement for all listed securitiesacross the exchanges from April 2, 2002 to move T+2 on April 1, 2003. Introduction of scientific model for risk management, based on VaR. Introduction of Electronic Data Information Filing And Retrieval(EDIFAR) System to facilitate electronic filing of certaindocuments/statements by the listed companies and their immediatedisclosure to the market participants.

Launch of Securities Market Awareness Campaign. Introduction of rating corporate governance on the principles ofwealth creation, wealth management and wealth sharing. Introduction of Straight Through Processing (STP) for the securitiestransaction. Implementation of a comprehensive risk management system forMutual Funds. Introduction of the Dual fungibility of ADRs and GDRs. Establishment of the Central Listing Authority (CLA). Issuance of necessary guidelines/circulars for Corporatization andDemutualization of stock exchanges. Introduction of the trading of Government Securities on the StockExchanges. Posting all the orders passed by the Securities Appellate Tribunal(SAT) and the Board on SEBI website, to bring in regulatorytransparency. Introducing the consultative process on policy formulation by puttingall reports of committees and draft regulations on SEBI website forseeking comments, suggestions and opinions from public.

Issuance of guidelines on Delisting of Securities from the StockExchanges. Establishment of inter-depository transfer through on-lineconnectivity between CDSL and NSDL.

SEBI (Insider Trading) Regulations, 1992 SEBI (Underwriters) Regulations, 1993 SEBI (Debenture Trustees) Regulations, 1993 SEBI (Portfolio Managers) Regulations, 1993

SEBI (Foreign Institutional Investors) Regulations, 1995 SEBI (Mutual Fund) Regulations, 1996 SEBI (Substantial Acquisition of Shares and Takeovers)Regulations, 1997 SEBI (Employee Stock Option Scheme & Employee StockPurchase Scheme) Guidelines, 1999. SEBI (Credit Rating Agencies) Regulations, 1999 SEBI (Issue of Sweat Equity) Regulations, 2002 SEBI (Procedure for Holding Enquiry by Enquiry Officer and

Review and amendment of the following regulations andguidelines a measure of regulatory proactiveness

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Rs.3 crore to extend margin trading facility to their clients in the cashsegment of stock exchanges.The brokers may use their own funds or borrow from scheduledcommercial banks or NBFCs regulated by RBI but the total indebtednessfor this purpose should not exceed five times the net worth.Securities Lending and BorrowingA clearing corporation/clearing house, after registration with SEBI, under

the SEBI scheme for Securities Lending and Borrowing, as an approvedintermediary, may borrow securities for meeting shortfalls in settlement,on behalf of the members.Secondary Market for Corporate Debt SecuritiesWith a view to providing greater transparency and protecting the interestsof investors in debt securities, SEBI has prescribed new guidelines forregulating private placement of debt securities issued by the corporates.Full disclosure (initial and continuing) as per Companies Act, 1956, SEBI(DIP) Guidelines, 2000 and Listing Agreement are to be made by thecompanies.Credit rating of debt securities, appointment of debenture trustees,separate Listing Agreement, frequent furnishing of periodical reports toSEBI etc. have been made mandatory to enhance the protection ofinvestors in debt instruments.Central Database of Market ParticipantsWith a view to promoting up-to-date information about all marketparticipants, SEBI has made it mandatory for every intermediary, to makean application for allotment of unique identification numbers for itself andfor its related persons, under the SEBI (Central Database of Market

Participants) Regulations, 2003).This will be made mandatory for investors and companies at a later date.Additional Continual DisclosuresWith a view to providing further transparency and mitigating impacts ofrumours and speculation, the brokers have been advised to disclose thedetails of bulk deals. Stock exchanges were advised to amend Clause 41of the Listing Agreement to make it mandatory for the listed companies topublish the number of investor complaints received, disposed of,unresolved alongwith their quarterly results.Enhance Market Safety and Reduce Credit Risk

Clearing and settlement cycle time has been further contracted to T+2with effect from April 1, 2003 and this measure is expected to result infaster settlement, higher safety and lower settlement risk in the Indiancapital market.Mutual FundsWith a view to strengthening the position, specifying accountability andprotecting the interest of investors, SEBI has defined the roles of ChiefExecutive Officer and Fund Manager of mutual funds.Regulatory practices should be fair to all concerned in the market place. In

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SEBI (Foreign Institutional Investors) (Amendment) Regulations,2003 SEBI (Mutual Funds) (Amendment) Regulations, 2003 SEBI (Depositories and Participants) (Amendment) Regulations,2003 SEBI (Debenture Trustees) (Amendment) Regulations, 2003 SEBI (Prohibition of Insider Trading) (Amendment) Regulations,

2003 SEBI (Issue of Sweat Equity) (Amendment) Regulations, 2003 SEBI (Stock Brokers and Sub-Brokers) (Amendment) Regulations,2003 SEBI (Stock Brokers and Sub-Brokers) (Second Amendment)Regulations, 2003 SEBI (Procedure for Holding Enquiry and Imposing Penalty)(Amendment) Regulations, 2003 SEBI (Ombudsman) (Amendment) Regulations, 2003 SEBI (Foreign Institutional Investors) (Amendment) Regulations,2004

During 2004-05

Allocation of shares to retail individual investors has been increasedfrom 25 per cent to 35 per cent of the total issue of securities in case ofbook-built issues. The retail individual investor has been redefined asone who applies or bids for securities of or for a value not exceedingRs. 1 lakh, as against the earlier limit of Rs. 50,000.

Allocation of Shares to Retail Individual Investors

The SEBI Disclosure and Investor Protection (DIP) Gudelines, 2000were amended in order to ensure better readability of the issueadvertisements appearing on television and to reduce the cost incurredin publishing pre-issue advertisements. The pre-issue advertisementwhich was mandatory for all public issues (fixed and book-built) shouldnow contain minimum details.

Issue Advertisement

The facility of shelf prospectus was introduced for public sectorbanks, scheduled banks and public financial institutions. They can filea draft shelf prospectus in the first instance disclosing the aggregate

amount they intend to raise through various tranches. Any amount ofover-subscription can be retained by the issuer in each tranche subjectto the overall limit set for the year.

Introduction of Shelf Prospectus

With an objective to widen the facility of Green Shoe Option, theSEBI (DIP) Guidelines, 2000 were amended to make it available incase of all public issues, viz., initial public offerings, follow-on offerings,public issues either through book building or fixed price route. All pre-IPO shareholders (including promoters) in case of IPOs and pre-issue

Green Shoe Option

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shareholders holding more than 5 per cent shares (includingpromoters) in case of follow-on offerings can lend their shares for thepurpose of green shoe option.

The SEBI (DIP) Guidelines, 2000 on issue norms were amended toprovide for a floor face value of Re. 1 per share in order to restrict thepre-IPO splitting of shares. The face value has to be necessarily Rs. 10

per share for issue price below Rs. 500 and in cases where the issueprice is Rs. 500 or more, the issuer companies can fix the face valuebelow Rs. 10 per share. The definition of the minimum application lot has been changedfrom Rs. 2,000 to a band of Rs. 5,000-Rs. 7,000. The applications canbe made in multiples of such value. The DIP Guidelines for preferential allotment were amended to: (a)restrict sale of shares by shareholders who are allotted shares onpreferential basis; (b) impose lock-in period on pre-preferentialshareholding from the relevant date till six months after the date ofallotment; (c) reduce the period for allotment from 30 to 15 days; and(d) facilitate corporate debt restructuring.

Issue Norms

To improve the standards of corporate governance, SEBI amendedClause 49 of the Listing Agreement. The major changes in the newClause 49 include amendments/additions to provisions relating todefinition of independent directors, strengthening the responsibilities ofaudit committees, improving quality of financial disclosures, includingthose pertaining to related party transactions and proceeds from

public/rights/preferential issues, requiring Boards to adopt formal codeof conduct, requiring CEO/CFO certification of financial statements andimproving disclosures to shareholders. Certain non-mandatory clauseslike whistle blower policy and restriction of the term of independentdirectors have also been included. The implementation schedule of the amended Clause 49 which wasinitially proposed to be effective from April 1, 2005 for listed companieshas been extended to December 31, 2005.

Corporate Governance

In order to further develop the corporate debt market, SEBI

prescribed a model debenture listing agreement for all debenturesecurities issued by an issuer irrespective of the mode of issuance.

Debt Listing Agreement

The existing structure of dematerialisation charges has beenrationalized to provide benefits to investors. With effect from February1, 2005, certain charges paid by investors were removed which includecharges towards opening of a Beneficiary Owner (BO) account, creditof securities into BO account and custody charge for BO accountopened on or after February 1, 2005. With effect from April 1, 2005, the

Rationalisation of Dematerialisation Charges

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FII position limits in the equity index derivative contracts wererevised. Accordingly, FII position limit in all index options and futurescontracts on a particular underlying index shall be Rs. 250 crore(separately for futures and options) or 15 per cent of the total openinterest of the market in index futures and index options, whichever ishigher per exchange. The frequency of reporting of offshore derivative instruments by

registered foreign institutional investors has been made monthly. The mutual funds and FIIs have been advised to enter the UniqueClient Code (UCC) pertaining to the parent entity at the order entrylevel and enter the UCCs for their individual schemes/sub-accounts onthe post-closing session.

A Securities Markets Infrastructure Leveraging Expert Task Force(SMILE Task Force) was constituted by SEBI to carry out a thoroughhealth check on the securities markets infrastructure encompassingall segments of the markets (viz. equities, debt, derivatives, fundproducts) and covering all market participants such as exchanges,trading platforms, clearing and settlement systems, payment systems,depositories, issue houses (registrars) and other intermediaries. TheTask Force has submitted reports on Infrastructure and Process Flowfor the Primary Market and Infrastructure and Process Flows forEnhancing Distribution Reach in the Mutual Fund Industry. TheReports are under consideration of SEBI for implementation.

SMILE Task Force

Securities and Exchange Board of India (SEBI) signed a

Memorandum of Understanding (MoU) with United States CommodityFutures Trading Commission (CFTC) at Washington on April 28, 2004.This is the sixth MoU that SEBI had signed with its internationalcounterparts for strengthening communication channels andestablishing a framework for assistance and mutual co-operationbetween the two organizations.In order to fine-tune the regulatory requirements, regulations amendedduring

MoU Signed with Overseas Regulators

SEBI (Venture Capital Funds) (Amendment) Regulations, 2004. SEBI (Foreign Venture Capital Investors) (Amendment)Regulations, 2004. SEBI (Central Database of Market Participants) (Amendment)Regulations, 2004. SEBI (Portfolio Managers) (Amendment) Regulations, 2004. SEBI (Depositories and Participants) (Amendment) Regulations,2004. SEBI (Buy-back of Securities) (Amendment) Regulations, 2004.

In order to fine-tune the regulatory requirements, regulations amendedduring 2004-05 are as follows:

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SEBI (Procedure for Holding Enquiry by Enquiry Officer andImposing Penalty) (Amendment) Regulations, 2004. SEBI (Substantial Acquisition of Shares and Takeovers)(Amendment) Regulations, 2004. SEBI (Procedure for Holding Enquiry by Enquiry Officer andImposing Penalty) (Second Amendment) Regulations, 2004. SEBI (Substantial Acquisition of Shares and Takeovers) (Second

Amendment) Regulations, 2004. SEBI (Procedure for Holding Enquiry by Enquiry Officer andImposing Penalty) (Third Amendment) Regulations, 2004.

Notification under Sub-Regulation (1) of Regulation 6 of Securitiesand Exchange Board of India (Central Database of MarketParticipants) Regulations. Notification under Sub-Regulation (2) of Regulation 6 of Securitiesand Exchange Board of India (Central Database of MarketParticipants) Regulations. Notification under Sub-Regulation (1) and (3) of Regulation 6 ofSecurities and Exchange Board of India (Central Database of MarketParticipants) Regulations. Notification under Sub-Regulation (1) of Regulation 5A of Securitiesand Exchange Board of India (Central Database of MarketParticipants) Regulations. Notification under Sub-Regulation (1) of Regulation 4 and Sub-

Regulation (1) and (2) of Regulation 6 of Securities and ExchangeBoard of India (Central Database of Market Participants) Regulations.

Amendments to the existing laws entail a detailed procedure. Pendingamendment to existing laws, regulatory pro-activeness was reflectedthrough the following set of notifications:

Primary Securities MarketI.

Within the category of Qualified Institutional Buyers (QIBs), therewas no specific allocation for any group in case of book built issues.In order to increase the retail participation through mutual funds,SEBI introduced a specific allocation of 5 per cent within the QIBcategory with effect from September 19, 2005. The mutual funds

are also eligible for allotment from the balance available for the QIBcategory.

Specific Allocation for Mutual Funds

In an effort to provide level playing field and also to preventmisuse of discretion exercised by the merchant bankers in theprocess of allocation of shares, it was decided that the allotment toQIBs shall also be made on a proportional basis.

Proportionate Allotment to QIBs

Although, there was no regulatory stipulation as regards theMargin Requirement for QIBs

During 2005-06

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Further issue of capital by a company, after filing a draft offerdocument with SEBI, was prohibited till the listing of shares that arereferred to in the offer document. In order to facilitate additionalresource mobilisation, a company has been permitted to issuefurther shares, provided full disclosures as regards the total capitalto be raised from such further issues are made in the draft offerdocument.

Under Clause 49 of the Listing Agreement, listed companieswere advised to comply with the revised guidelines on corporategovernance, including appointment of the independent directors.Initially the compliance date was April 1, 2005, which wassubsequently extended to December 31, 2005. Without furtherextension of the deadline, a few clarifications were given in January2006 relating to maximum gap between two Board meetings, sittingfees of the non-executive directors and certification on internalcontrol system by the CEO/CFO.

Corporate Governance of Listed Companies

Secondary Securities MarketII.

In order to facilitate execution of large trades without impactingthe market, the stock exchanges were allowed to provide a separatetrading window for block deals subject to certain conditions. BSEand NSE activated this window with effect from November 14, 2005.

Separate Window for Execution of Block Deals

In order to enable an investor, who is not satisfied with theservices of a DP, to shift his Beneficiary Owner (BO) account to

another DP, SEBI advised the depositories/DPs not to levy anycharges when a BO transfers all his securities lying in his account toanother branch of the same DP or to another DP of the samedepository or another depository, provided the BO accounts at thetransferee DP and at transferor DP are one and the same.

Review of Dematerialisation Charges

There is a time gap of about four to five days between thecrediting of securities to a Beneficiary Owners account and thecommencement of trading. The time gap was utilised by a fewinvestors to indulge in offmarket trades prior to the commencement

of trading. In order to prevent such transactions, SEBI adviseddepositories that, in case of IPOs, the ISINs of securities should beactivated only on the date of commencement of trading on the stockexchanges.

Activation of ISINs of Initial Public Offerings (IPOs)

Following recommendations of the Jagdish Capoor Committee, itwas decided to resume registration under the MAPIN regulations inphases and obtain the Unique Identification Number (UIN) withbiometric impression for a trade order value of Rs. 5 lakh and

SEBI (Central Database of Market Participants) Regulations, 2003

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above. For trade order of value less than Rs. 5 lakh, a choice isgiven to the investors (natural persons) to provide either thePermanent Account Number (PAN) of the Income Tax Departmentor UIN obtained under MAPIN. Pending implementation of theabove decision, PAN has been made compulsory for all categoriesof investors for opening a demat account with effect from April 1,2006. The existing demat account holders are required to submit

details of PAN by September 30, 2006.

In order to streamline the settlement system, consistent withIOSCO recommendations, transactions executed on the stockexchanges would be necessarily settled through the clearingcorporation/clearing house of the stock exchanges. The earlierpractice of Hand Delivery Bargains/Delivery versus Payment (DvP)was discontinued with effect from September 19, 2005.

Discontinuation of Hand Delivery Bargains/Delivery versus Payment

In order to provide further safeguard to the issuance of contractnotes, additional conditions were prescribed such as sending ofElectronic Contract Notes (ECNs) to a designated e-mail ID andretention of acknowledgements of receipt/proof of delivery only tosuch clients who have consented for the same. Wherever the ECNshave not been delivered or have been rejected by the e-mail ID ofthe client, the broker is obligated to send the physical contractnote(s) within the stipulated time under the extant SEBI guidelines.

Guidelines for Issuing Electronic Contract Notes

On the basis of information as regards connectivity of companiesprovided by the depositories, stock exchanges were advised to shiftthe shares of certain companies from trade-for-trade segment torolling settlement subject to their having at least 50 per cent of non-promoter holdings in demat mode as per Clause 35 of the ListingAgreement.

Shifting of Securities from Trade-for-Trade Segment to RollingSettlement

A Committee was set up under the Chairmanship of Shri G.Anantharaman, Whole Time Member, SEBI to review and examinethe future of the Regional Stock Exchanges (RSEs) - post-

demutualisation. According to the terms of reference, theCommittee has to deliberate and advise on the future role of RSEs,manner of dealing with assets in the event of withdrawal ofrecognition and the process of divestment of shareholding.

Committee to Study the Future of Regional Stock Exchanges

Based on the recommendations of the Secondary MarketAdvisory Committee, the trading member position limit for stockbased derivatives has been revised. Derivatives can be introduced on stocks of large companies

Policy Initiatives for Derivatives

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foreign companies subject to the conditions stipulated by RBI andSEBI from time to time.

Foreign Institutional Investors (FIIs)IV.

The outstanding limit for FII investment in debt securities for2006-07 has been revised upward by the Government within theoverall limit of External Commercial Borrowings (ECBs). While such

limit for Government Securities (including Treasury Bills) was raisedfrom US $ 1.75 billion to US $ 2.00 billion, the same for thecorporate debt had been increased from US $ 0.5 billion to US $ 1.5billion. The sub-ceilings continued to remain separate and notfungible.

FII Investment in Debt Securities

Corporate RestructuringV.

In order to provide flexibility to corporate restructuring, SEBI(Substantial Acquisition of Shares and Takeovers) Regulations,1997 is being amended which include, inter alia, removal ofrestrictions on market purchases and preferential allotments. Theoutgoing shareholders can sell entire stake to the incoming acquirerin case of takeover. However, if the target companys minimumpublic shareholding falls below the prescribed minimum, therestoration should take place through a framework provided by therevised Clause 40A of the Listing Agreement.

Takeovers

In order to simplify the existing framework, the SEBI (Delisting ofSecurities) Guidelines, 2003 were amended, making it possible for

stock exchanges to delist the shares of errant companies which arenot complying with the Listing Agreement.

Delisting of Securities

Regulatory AmendmentsVI. In order to fine-tune the regulatory requirements, followingregulations were amended during 2005-06: SEBI (Procedure for Holding Enquiry by Enquiry Officer andImposing Penalty) (Amendment) Regulations, 2005. SEBI (Mutual Funds) (Amendment) Regulations, 2006. SEBI (Custodian of Securities) (Amendment) Regulations, 2006. SEBI (Venture Capital Funds) (Amendment) Regulations, 2006.

Primary Securities MarketI.Continuous Listing Requirement: Minimum Level of PublicShareholdingTo enable a minimum level of public shareholding, listed companieswill now be required to maintain minimum level of public shareholdingat 25 per cent of the total shares issued for continued listing on stockexchanges. Exemptions are provided to companies which are requiredto maintain at least 10 per cent but less than 25 per cent in accordance

During 2006-07

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Standing Committee for Addressing Problems in Computerised TradingThe stock exchanges were advised to set up Standing Committees toinvestigate the problems in computerised trading system, such as,hanging, slowdown, breakdown, and any other problem. The matterwould be referred to respective Standing Committee, even if, theduration of disruption is less than five minutes.Dissemination of Tariff/Charge Structure of Depository Participants

(DPs)Following the representations made by investors, on differentcharge/tariff structure of various DPs, it was decided that the DPs willimmediately inform respective depositories, about any change incharge/tariff structure. The depositories were directed to displaycharge/tariff structure of various DPs on their websites to helpinvestors in taking informed decisions.Safeguards to Address the Transfer of Securities of the InvestorsA large number of representations were received from investorsrelating to transfer of securities from Beneficiary Owners (BOs)Account without proper authorisation. Accordingly, the DPs wereinstructed to put in place adequate safeguards.Policy Initiatives for DerivativesProcedure for re-introduction of derivatives contracts and modifiedposition limits were reviewed by the Secondary Market AdvisoryCommittee (SMAC). Further, based on a decision taken by SEBIBoard, Derivatives Market Review Committee was set up to carry out acomprehensive review of developments and to suggest futuredirections for derivatives market in India.

Corporatisation and Demutualisation (C & D) of Stock ExchangesSEBI notified Securities Contracts (Regulation) (Manner of Increasingand Maintaining Public Shareholding in Recognised Stock Exchanges)Regulations, 2006 on November 13, 2006, whereby the recognisedstock exchanges were directed to ensure that at least 51 per cent of itsequity share capital is held by public, either by fresh issue of equityshares to the public, through issue of prospectus or through (i) offer forsale, (ii) placement of shares to institutions, (iii) issue of equity shareson private placement, and (iv) any combination of the above.Mutual FundsIII.

Rationalisation of Initial Issue Expenses and Dividend DistributionProceduresTo contain frequent churning in mutual fund schemes, close-endedschemes were permitted to charge initial issue expenses to thescheme while open-ended schemes can charge only entry load for thepurpose of meeting the expenses connected with sales and distributionof schemes. Dividend distribution procedures were also specified bySEBI. Notice to be issued to public within one calendar day of thedecision by the trustees on dividend distribution.

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Undertaking from Trustees for New Scheme Offer DocumentTo address concerns regarding launch of similar products, mutual fundtrustees were directed to certify that the scheme approved by them is anew product and it is not a minor modification of existingscheme/product.Investment in ADRs/GDRs/Foreign Securities and Overseas ExchangeTraded Funds (ETFs)

Following the Finance Bill 2006-07 and subsequent raising of limit byRBI, the maximum ceiling for individual mutual funds to invest inADRs/GDRs issued by Indian companies, equity of overseascompanies listed on recognised stock exchanges overseas and rateddebt securities was raised from USD 50 million to USD 100 million.Subsequently, the limit was further raised to USD 150 million. Mutualfunds were also advised to appoint a dedicated fund manager formaking such investments.Introduction of Capital Protection Oriented SchemesSEBI (Mutual Funds) Regulations, 1996 were amended to permitlaunch of Capital Protection Oriented schemes.Uniform Cut-off Timing for Applicability of Net Asset Value (NAV)Following the various systemic changes made by RBI in money marketthe cut-off timings for applicability of NAV, in case of purchases andredemptions of liquid schemes, were revised.Dispatch of Statement of AccountsSEBI directed mutual funds to dispatch the statement of accounts tothe unit holders under Systematic Investment Plan (SIP) / SystematicTransfer Plan (STP) / Systematic Withdrawal Plan (SWP) once every

quarter ending March, June, September and December, within 10working days of the end of the respective quarter. SEBI also advisedmutual funds to provide statement of accounts to the unit holders, whohave not transacted during the last six months, to ensure betterinformation dissemination.Launch of Gold Exchange Traded Funds (GETFs)SEBI amended SEBI (Mutual Funds) Regulations, 1996 to specify themethodology for valuation of gold for the purpose of GETFs.Accordingly, the gold held by a GETF scheme shall be v